Lawmakers approve withholding fix for contractors

John Fritze, The Baltimore Sun

Government contractors applauded congressional action Wednesday to repeal a federal law that would have postponed millions of dollars in payments to Maryland companies, potentially wounding the region's fragile economy.

In a rare display of bipartisanship, the House of Representatives voted 422-0 Wednesday to revoke a requirement that federal, state and local governments withhold 3 percent of payments to contractors. The repeal was part of President Barack Obama's $447 billion jobs bill and now heads to the White House for his signature.

Enforcement of the requirement, which was set to begin in 2013, could have had a pronounced impact in Maryland, which ranks third after the District of Columbia and Virginia in per-capita federal spending on contracts. State businesses are awarded about $27 billion in contracts annually.

Three percent of that figure is $810 million — and that doesn't include money to state and local contractors.

"The net effect was that in a time when the economy needs to be stimulated, we would have taken 3 percent of all of those dollars and just put them on the sideline," said Joel Zingeser, director of corporate development of Rockville-based Grunley Construction Co., which does work for the federal government. "It really didn't make sense."

The provision was originally intended to ensure that federal money was not spent on businesses that owed back taxes. The withheld money was to be returned once taxes were filed.

But the provision proved unpopular almost immediately. Federal and state officials complained about implementing the rule and warned that some contractors would pass the cost along in the form of higher bids. The Department of Defense estimated in 2008 that it would spend $17 billion to comply with the rule.

"When you add the costs up, taxpayers would have ended up paying more," said Jeffrey L. Esser, executive director of the Government Finance Officers Association.

Despite bipartisan support on Capitol Hill, past efforts to repeal the measure stalled.

"Everybody kind of agreed it was a bad idea," said Stan Soloway, president of the Professional Services Council, a trade group that represents federal contractors in Maryland and elsewhere. "But it's really hard to undo a law."

While contractors who are up to date on taxes would ultimately have received the withheld money, business groups argued that pulling it out of the economy — even temporarily — meant they would not have the cash flow to make hires or start new work.

Zingeser said a construction company's cash can be leveraged many times over for surety bonds that the firms must have to ensure that a project is completed. Less cash flow, he said, makes it harder for the company to start a project.

"It's a huge financial hardship for a lot of these contractors," said Lynne H. Gummo, a director at the Sparks-based accounting firm SC&H Group. The company, which has about 300 employees in Maryland, Virginia and Georgia, is often hired by government contractors to keep their books and also would have been affected by the withholding requirement.

But while companies say the requirement could have hurt the economy had it been implemented, there is no promise of a bump in hiring now that it has been repealed. Some Democrats and Republicans have expressed skepticism that repeal would free up cash that companies had been sitting on.

Many of the largest federal contractors in Maryland, including Northrop Grumman, IBM and Westat, a Rockville research company, declined to comment.

In a bitterly divided Congress, the repeal of the withholding provision sailed through the House and Senate. The bill includes a popular provision to offer more generous tax cuts to businesses that hire out-of-work veterans.

The provisions are the only ones included in Obama's broad jobs bill that Congress has passed. Unveiled in September, the package would continue payroll tax cuts for workers and employers, pump money into infrastructure and school improvements, and extend benefits for the long-term unemployed.

Leaders in both parties praised the measure as an important step.

"This law was intended to ensure payment of taxes from contractors doing business with the government but would instead limit their ability to hire more workers," said Rep. Steny H. Hoyer of Maryland, the House minority whip. "It is important that we provide all types of businesses every resource they need to grow."

Majority Leader Eric Cantor, a Virginia Republican, said the repeal "removes the threat of unnecessary costs to allow small businesses, universities and manufacturers to put their capital toward expanding and creating jobs."